The average Western investor tends to raise an eyebrow when analysts use terms such as “emerging” to describe China’s middle class. How can the middle class of the world’s #2 nation by nominal GDP be… emerging? The answer is straightforward and lies in simply understanding what the Gross Domestic Product actually measures.
Without going into too much detail, the GDP simply quantifies the economic activity of everyone COMBINED (within a country’s borders, of course) and as a result, a large GDP doesn’t necessarily have to come with having a robust middle class… it can simply be a function of a country’s population and in China, that’s precisely how things stand.
While the GDP Per Capita is now roughly 25 times higher in China than it was toward the end of Mao Zedong’s life, it’s still approximately 6 times lower than that of the United States, almost 6.5 times lower in fact if we use World Bank data (for the current situation of China according to the World Bank, click HERE and for the current situation of the United States, click HERE).
Most Westerners have difficulties comprehending just how poor China was prior to Deng Xiaoping’s reforms (let’s say prior to 1978). They’re just used to hearing how China keeps growing and, naturally, assume that just because China has been experiencing tremendous growth not for years but downright decades, it HAS to mean its middle class is quite affluent by now. Unfortunately not for China but for the average Chineze citizen, no, it doesn’t. At least not yet.
In light of its GDP Per Capita which is nowhere near Western values, we can say that China’s middle class is just now emerging. Just now starting to become meaningfully financial potent. Just now experiencing unheard of challenges such as having to figure out how to spend their excess income, challenges their parents and grandparents would have considered impossible to even comprehend a few decades ago.
This status quo brings about mostly positive but also certain negative elements.
On the positive side, it’s vital for China to nurture its middle class and ensure robust consumption trends persist because at this stage in its economic development cycle, China needs strong domestic consumption. It needs the population to become more and more educated. To start Chinese businesses, which don’t leave once the economy experiences a downturn and on the contrary, have actual staying power.
A China with strong domestic companies which are able and willing to cater to its strong internal consumption needs can be considered far more resilient than a China with a poor and thereby frequently uneducated population, which is only capable of engaging in low value-added activities and subsequently unable to earn enough income that it can… well, consume. Think of it as the difference between a vicious circle and a virtuous one because that’s what it ultimately all boils down to.
There are, however, also challenges involved. An emerging middle class is inevitably not all that sophisticated and with this come potentially systemic risks. For example, as explained in another article, Chinese investors frequently see their asset allocation strategy in a “pump and dump” manner. Or, in other words, they are (more so than sophisticated investors) likely to jump on the bandwagon recklessly when times are good and panic sell when things go sour. The exact opposite of the systemic robustness and staying power (in this case, of capital) that has been mentioned previously.
Still, even if there are inevitably negative aspects involved as well, the pros clearly outweigh the cons. Frankly, when it comes to the cons, most of them will simply be eliminated from the equation as time passes and the Chinese middle class becomes more financially educated or, if you will, sophisticated.
A rational conclusion can therefore only be this: ignore the rising Chinese middle class at your peril. It’s a textbook example of a Chine-related mega-trend that isn’t going away and, on the contrary, will only become more and more obvious as time passes. As a company that firmly has its finger on China’s “ground-level” pulse as a result of engaging in robust local business activities, ChinaFund.com is looking forward to helping you make the most of the generation-defining opportunities brought about by the emergence of China’s middle class.